For decades, Japan’s stock market languished as an unloved corner of the global investment landscape. Now, however, the tables have turned dramatically. The Nikkei 225 index, Japan’s stock market benchmark, has soared to a 33-year peak, marking a seismic shift in the fortunes of the world’s third-largest economy. With a stunning 28.2 percent increase last year, it outperformed many global counterparts, including the S&P 500 in the United States.
The surge in the Nikkei 225 is not a short-lived phenomenon. In January alone, the index climbed an additional 8 percent, buoyed by robust foreign investment. Some analysts are even predicting that the Nikkei could surpass its all-time high of 38,915.87, reached in 1989, by 2024. This resurgence in Japan’s stock market is attributed to several key factors.
Foremost among the drivers of this rally is a dramatic improvement in corporate profitability. Businesses in Japan are seeing swift recovery from previously depressed levels, with strong profit growth and relatively low price/earnings ratios. This bullish trend is underpinned by a series of corporate governance reforms aimed at enhancing shareholder value through dividends and share buybacks. The depreciation of the yen, which has reached its lowest point since the 1990s, further amplifies corporate earnings and renders Japanese stocks an attractive proposition for international investors.
Warren Buffett, the billionaire investor renowned for his shrewd investment choices, has thrown his weight behind Japanese stocks, citing their compelling valuation as a key reason for his substantial investments in the country during the COVID-19 pandemic.
In parallel, Japan’s government has embarked on initiatives to nurture a more investment-centric culture under Prime Minister Fumio Kishida’s “new capitalism” vision. Efforts to revitalize the Nippon Individual Savings Account (NISA) program, featuring increased investment limits and extended tax exemptions, are part of this broader strategy to shift the public’s preference from saving to investing.
After years of deflationary pressures, there are early signs that the Japanese economy may be moving towards a cycle of gradual inflation, bolstered by significant wage increases—the largest the country has seen since the early 1990s. This shift is seen as crucial for sustaining the stock market’s momentum.
However, Japan’s stock market boom is unfolding against the backdrop of global economic shifts, including challenges in other major markets like China. As investors reassess their global portfolios, Japanese stocks have emerged as a compelling alternative, drawing significant capital away from less favorable markets.
Yet, this bullish outlook is not without its skeptics. Some experts caution that the current gains may not be sustainable over the long term, citing potential macroeconomic shifts and structural issues within the Japanese economy. The anticipated rise of the yen, potential changes in business sentiment in the United States and Europe, and enduring structural challenges such as Japan’s aging population and labor market rigidity could pose hurdles to sustained growth.
Despite these concerns, there is a prevailing sense of optimism spurred by recent government and corporate initiatives targeting increased productivity and shareholder value. The true test, however, will be the upcoming wage negotiations, which will offer clearer insights into Japan’s economic trajectory.
In summation, Japan’s stock market is experiencing a remarkable revival, buoyed by improved corporate profitability, governance reforms, and favorable economic policies. While challenges remain, the current trend heralds a significant shift in the global investment landscape, with Japan’s stock market reclaiming its position as a front-runner. As the year progresses, the world will be watching closely to see if this resurgence can solidify Japan’s long-term economic prospects.
